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Debt Constraints and the Labor Wedge

Kehoe, P; Midrigan, V; Pastorino, E; (2016) Debt Constraints and the Labor Wedge. American Economic Review: Papers & Proceedings , 106 (5) pp. 548-553. 10.1257/aer.p20161088. Green open access

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Abstract

Changes in household debt and employment across regions of the U.S. during the Great Recession are highly correlated: regions where the decrease in household debt was most pronounced were also regions where the decline in employment was most severe. We show that the drop in employment in the regions that have experienced the largest decrease in household debt is mostly accounted for by changes in the labor wedge (deviations from a static consumption-leisure choice) as opposed to changes in real wages. We argue that such a pattern is consistent with fluctuations in debt constraints in a standard Bewley-Aiyagari model.

Type: Article
Title: Debt Constraints and the Labor Wedge
Open access status: An open access version is available from UCL Discovery
DOI: 10.1257/aer.p20161088
Publisher version: http://dx.doi.org/10.1257/aer.p20161088
Language: English
Additional information: This version is the version of record. For information on re-use, please refer to the publisher’s terms and conditions.
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
URI: https://discovery.ucl.ac.uk/id/eprint/10054393
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